30 years of budget problem mileposts

Bee Columnist Dan Walters walks you through some mileposts on the road to this year's state budget stalemate.

By Dan Walters - dwalters@sacbee.com

MILE 1 -- PROP 13

1978: Before 1978, fashioning a state budget each year was a fairly routine task. But passage of Proposition 13 in June 1978, which slashed local property taxes, began a radical budgeting makeover. General fund spending jumped as the state assumed greater responsibility for schools and local services.

MILE 2 -- GANN LIMIT

1979-1990: After Proposition 13 passed in 1978, its co-author, Paul Gann, sponsored a 1979 measure to limit government spending increases to inflation and population growth, with excess revenues rebated to taxpayers. The measure limited state spending increases in the 1980s, and mandated one rebate, but was loosened in 1990 as part of deal between Republican Gov. George Deukmejian and Democratic legislators on a boost in gas taxes. The Gann Limit has never been a factor in the state budget since, but Republicans are now demanding that it be revived.

MILE 3 -- PROP 98

1988: The budget continued to balloon as the state assumed more burdens previously borne by property taxes. In 1988, a coalition led by the California Teachers Association persuaded voters to pass Proposition 98, aimed at giving schools a guaranteed portion -- 40 percent or more -- of the state's revenues.

MILE 4 -- TAX HIKES

1991: The end of the Cold War and the rapid drop in military spending plunged the state into the worst recession in a half-century. General fund spending was virtually frozen at about $40 billion for several years as GOP Gov. Pete Wilson battled with Democrats and the CTA. They balanced the budget by raising income and sales taxes, cutting some state spending and forcing local governments to shoulder some of the impact. A temporary sales tax increase was later made permanent, with approval of voters, to make up some of the losses to local governments.

MILE 5 -- TAX CUTS

1999-2000: A new economic surge, centered on the high-tech industry, flooded state coffers. Revenues -- mostly income taxes -- skyrocketed to $75.7 billion in 2000-01. Under Wilson and then-Democratic Gov. Gray Davis, spending also jumped sharply for schools and health care for the poor. Republicans demanded and got billions of dollars in corporate and individual tax cuts, including a two-thirds cut in property taxes that motorists paid on their cars, known as vehicle license fees or the car tax.

MILE 6 -- .COM BUST

2001: The surge of revenue from high-tech stock transactions was a one-time windfall. As the dot-com bubble burst, revenues dropped to $62.7 billion in 2001-02, leaving the state with a $14 billion operating deficit that year. Thus began a cycle of deficits that has plagued the state ever since. The gap narrowed somewhat middecade as the state"s economy picked up again, but has worsened since the housing industry"s meltdown.

MILE 7 -- CAR TAX

2003: As the state's deficit worsened, Davis reinstated the car tax to ease the impact on the general fund. The move added fuel to a drive to recall him. Actor Arnold Schwarzenegger made restoring the tax break a cornerstone of his campaign, a promise he fulfilled in his first act as governor, even as he promised to end "crazy deficit spending."

MILE 8 -- BONDS & DEBT

2004: Schwarzenegger persuaded voters to approve $15 billion in bonds to refinance short-term debt the state could not repay. Repaying those bonds has become a multibillion-dollar bite on the general fund, worsening the deficit. His aides contend that the repayments should not be counted as spending increases on his watch, since they covered deficits run up during the Davis years. Overall, however, general fund spending has outstripped population growth and inflation during Schwarzenegger's five years as governor. Gaps have been covered largely by borrowing, including raids on special funds, and accounting maneuvers, such as shifting liabilities to the next fiscal year.

MILE 9 -- BIG GAP

2008: Schwarzenegger pegged the 2008-09 deficit at $15.2 billion plus another $2 billion he said the state needed as an emergency reserve. He initially proposed borrowing against the state lottery's future profits, as well as making some spending cuts and accounting maneuvers to close the gap. A 2008-09 budget was finally passed in September, but was based on outdated economic data and immediately began falling apart, leading to another protracted stalemate.

Mile 10 - BUDGETING 24/7

2009: Schwarzenegger and the Legislature - meaning the Democrats and a handful of Republicans - did a deal in February to close an 18-month gap estimated at $40 billion, including about $12.5 billion in new income, sales and car taxes as well as borrowing against the state lottery's future profits and raids on special funds for mental health and children's programs that required voter approval. They placed a half-dozen budget related measures on the May 19 special election ballot but only one, freezing legislators' salaries in times of fiscal distress, was approved. The rest, including Schwarzenegger's rolling spending limit, were overwhelmingly defeated.

Meanwhile, the state's economy continued to decline, with unemployment topping 11 percent, and income and sales tax revenues plummeted. By the time the May 19 votes had been counted, Schwarzenegger was saying the state faced a new $24 billion deficit in the 2009-10 budget, but refused to raise taxes to cover it, proposing, instead, huge cuts in health and welfare spending, including elimination of the states chief welfare payment program for the poor.

The Legislature's dominant Democrats responded with a budget of their own that made fewer cuts and imposed new taxes, including a first-ever tax on oil production that Schwarzenegger had first suggested.

Democrats plan to bring their version to the floors of both houses within a few days and Schwarzenegger promises to veto it if, by some chance, it passes. Meanwhile, the state could run out of cash in late July and needs a new budget in place to seek short-term cash flow loans to keep its check-writing machines working.